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REPARATIONS 

and 

INTERNATIONAL DEBTS 

An Address by the 

Right Honorable Reginald McKenna 

Chairman of the London Joint City and Midland Bank, Ltd. 
At the Convention of the 

American Bankers Association 

New York, October 4, 1922 



PUBLISHED BY 

THE NEW YORK TRUST COMPANY 

100 BROADWAY 

NEW YORK 



Reparations and International Debts 

From an Address by The Right Hon. R. McKenna, Chairman 
of the London Joint City and Midland Bank, Limited 



When I received the honor of your invita- 
tion which I greatly appreciated, I must con- 
fess I had many misgivings. I knew it would 
not be a light task to address an audience 
whose collective importance in the world of 
finance is unrivalled. I remembered, how- 
ever, the cordial friendship which has always 
existed between American and British bank- 
ers, and as I realized that your invitation was 
a further evidence of this friendship my hesi- 
tation gave way and I gladly decided to come. 

Let me begin with an explanation of my 
choice of subject. I thought at first that 
some professional topic should be selected, 
but I soon came across a serious difficulty. 
There is a much greater difference between 
tile law and practice of banking in America 
and England than is generally supposed, and 
I felt that I should be liable to be misunder- 
stood unless this difference were constantly 
borne in mind. Tliis very meeting will illus- 
trate the point. 

I understand there are over thirty thou- 
sand separate banks in the United States, a 
large number of wliich are represented here. 
In the whole of Great Britain we have only 
thirty-nine. But with us the branch system 
is so highly developed that these few banks 
have no less than 9,650 branches, of which 
6,800 belong to five banks alone. 

Differences Between 
British and 
American Banking 

The main distinction is that our banks are 
regarded by the legislature as ordinary cor- 
porations or companies, while yours are sub- 
ject to special legislation in regard to nearly 
all their activities. You have a limit pre- 
scribed to the amount of a loan to any one 



customer. Certain loans are prohibited and 
others are restricted. Your investments are 
regulated. You are subject to limitations in 
incurring contingent liabilities and you are 
bound to maintain minimum cash reserves. 
We have none of these restrictions. Alone 
amongst deposit banking countries the United 
States protects depositors, some of the states 
going so far as to prescribe a system of guar- 
antee. 

Britain's Central 
Bank System 

We differ also in our central bank polic}'. 
You have adopted the Federal Reserve Sys- 
tem under wliich there are twelve Federal Re- 
serve Banks in twelve districts. In England 
we have a single central bank of issue, a joint 
stock corporation which deals with private 
customers as well as Avith the Govermnent 
and the banks. Your Federal Reserve notes 
are issued against gold and self-liquidating 
commercial paper. Our Bank of England 
notes are issued against gold only, with a 
fiduciary issue of £18,450,000. 

The principles of sound banking are the 
same everywhere, but our countries diverge 
in law and practice. This is natural : British 
social and political conditions differ so much 
from yours that the same banking system 
could hardly be appropriate to both. Per- 
haps we have each sometliing to learn from 
the other, but I am sure any hasty attempt 
to establish a common procedure in the 
two countries would be unwise. As our de- 
velopment has progressed each nation has 
adapted itself to its environment, and such 
changes as we may make in the future must 
confonn to the habits and traditions of our 
peoples. 



With these thoughts in mind I found it 
very difficult to select a technical banking 
subject for discussion today. However care- 
ful I might be I felt that, unless accompanied 
by much tedious explanation, my language, 
associated with ideas related to English prac- 
tice, would be liable to be misunderstood by 
3'ou whose associated ideas are so different. 
I resolved therefore to pass over professional 
banking topics and to look for a subject of 
general interest to the business community. 
What should tliis be.'' 

Reparations and 
International Debts 

In their report to the Reparation Com- 
mission the Bankers' Committee wliich sat 
early this summer in Paris laid stress upon 
the need to resume nonnal trade conditions 
between countries and to stabilize exchanges, 
and they came to the conclusion that neither 
of these aims could be accomplished without 
a definite settlement of the reparation and 
other international debts. Here then it seemed 
to me was a subject for my address. 

There will be general agreement that there 
is no matter of more deep concern to the 
world's trade at the present time than repa- 
ration payments and international debts, and 
I trust therefore you will not deem it out of 
place that I have chosen this subject for dis- 
cussion today. 

There are two preliminary observations 
which I must make. The first is that I speak 
as a banker expressing my personal views. I 
have nothing to do with politics and I do 
not appear here in any representative char- 
acter. I approach the question solely from 
the economic point of view and my endeavor 
is to determine so far as I can the limit of 
the debtors' capacity to pay, and the effect 
of payment upon the world's trade. Our 
duty is to satisfy ourselves on the financial 
possibilities of the case. It is not what the 
debtors may justly be called upon to pay, 
but what they are able to pay, which we as 
business men, anxious to discover the condi- 
tions upon which trade prosperity is founded, 
must consider with the most careful attention. 



My second observation is to meet a pos- 
sible criticism. How can I, a member of a 
nation which is one of the debtors of the 
United States, speak freely to an American 
audience upon international indebtedness? 
The primary and essential duty of a debtor 
is to discharge liis liability, and, until this is 
done, all observations on the origin of the 
debt and on the economic consequences of 
international payments are liable to be 
viewed with suspicion. A creditor may, if he 
like, open up questions of that kind, but a 
debtor should admit liis obligation without 
further discussion. I recognize that these 
are objections wlnich I must answer and I be- 
lieve that I can do so conclusively. 

In the course of my argument I shall show 
that England has the ability to pay, and, 
once that is established, I can unhesitatingly 
assert her determination to honor her bond 
in full. I believe I am justified in asking you 
to treat England's debt to the United States 
as certain to be provided for, and, if this be 
conceded, we shall be free to consider the 
question of the remaining international debts 
as one in which America and England are 
equally concerned and in which both have the 
same interest as creditors. 

Magnitude of 
the War Debts 

First, let us look at the magnitude of these 
international debts. The greatest of all is 
that of Germany for reparations, a debt of 
which the United States decUned to receive 
any shares. The amount was not defined by 
the Treaty of Versailles, but subsequently by 
the London Ultimatum it was put at 32 bil- 
lion dollars, at wliich amount it stands nom- 
inally today. Of the remaining debts the 
liability of France to the United States and 
Great Britain is 6I/2 billion dollars, and of 
Italy to the same two countries 41/2 billion 
dollars. Russia owes these countries SYo bil- 
lion dollars and a further 1 billion dollars to 
France. These are the principal debts ; the 
others are all comparatively small in amount. 
Of the creditors of the European Continental 
Goverments, England is the greatest. 



We have no record in history of interna- 
tional claims of this magnitude. The in- 
demnity exacted by Germany from France 
under the Treaty of Frankfort in 1871, in 
round figures 1 billion dollars, created the 
largest debt between Governments ever known 
unto the recent war, and is the only prece- 
dent we have of a considerable international 
payment. It is of interest to recall how the 
liability was discharged. Paj'ment of 150 
million dollars was made in gold and silver 
coin and in German banknotes and currency 
collected in France and the balance in for- 
eign bills, chiefly German currency' bills. 



How France Paid 
the 1871 Indemnity 

The precise form in which the payment was 
made is however comparatively unimportant. 
For our present pui"pose the significant ques- 
tion is how France procured the means of 
payment. She was bound to acquire German 
marks or foreign currency exchangeable for 
marks, and to do so she had either to find 
German or other foreign buyers for such 
things as she had to sell or to obtain foreign 
subscriptions to her loans. Very consider- 
able sales were made of foreign securities 
owned by French nationals, the French loans 
were largely subscribed externally, and the 
export of French goods was so much in- 
creased that an average excess of imports of 
(\o million dollars a j'ear in the four years 
18G8-1S71 was converted into an average. ex- 
cess of exports of 46 million doDars a year 
in the four subsequent j'ears. By September, 
1873, the whole indemnity was paid, and al- 
though France remained to be liable for the 
loans she had issued, she was clear of any 
direct debt to the German Government, and 
indeed of all foreign debt payable in any but 
her own currency. 

Here we have an example of a very con- 
siderable international debt rapidly paid off 
without any serious disorganization of the 
world's trade. Now what were the conditions 
which made this possible? The war had been 
short, and the same amount of indemnity was 



well within the capacity of France to pay. 
Her nationals held large blocks of foreign 
securities, which were realizable in foreign 
markets ; her credit was good, which enabled 
her to obtain foreign subscriptions to her 
loans ; and in her effort to increase her ex- 
ports she was not hampered by high tariffs. 



France's Resources in 
Accumulated Wealth 

She was driven off the gold standard and, 
although there was some decline in the value 
of the franc, the depreciation never exceeded 
5 per cent, and, taking the whole period 
through, amounted to barely more than 1 
per cent. But of the several factors in the 
French ability to pay the most important 
lay in her accumulated reserve of wealth, the 
foreign securities owned by her nationals. 

It is interesting to note the industrial con- 
dition of France at that time. Employment 
was extremely active and production was 
on a great scale. She had to meet her ex- 
ternal liabilities, which compelled her to in- 
crease her sales in foreign markets, and she 
did so notwithstanding the competition of 
other nations. The improved standard of 
efficiency in production which was thereby 
forced upon her endured long after the period 
of the indemnity. In Germany, on the other 
hand, there was a verj' different experience. 
The receipt of a large amount of gold and 
silver had, with other causes then in opera- 
tion, a serious effect upon German internal 
prices, which rose rapidly. 



Effects Upon Germany 
of French Payments 

In 1872 there was a brief trade and finan- 
cial boom, followed in the ensuing year by a 
ci'isis which was the beginning of a period of 
depression. It would not be correct to say 
that the trade conditions in Germany were 
entirely due to the payment of the French 
indemnity, but undoubtedly it was a contrib- 
utory cause of material importance. The 



comparative prosperity in France and de- 
pression in Germany are remarkable and give 
color to the storj that Bismarck, in com- 
menting upon the state of the two countries, 
declared that the next time he defeated 
France he would insist on paying an indem- 
nity. 

Such is the only precedent we have for the 
payment of a great international debt. The 
figures we have to deal with today are on a 
far larger scale than the indemnity exacted 
from France fifty years ago, but the problem 
in all essential particulars is the same. We 
have to discover the capacity of the debtors 
to pay and to consider the consequences of 
payment. As the indemnity demanded from 
Germany is much the greatest of the debts 
and is the one most urgently in need of satis- 
factory settlement I place it in the front of 
our discussion. 



Germany's Capacity 
to Pay Reparations 

The first question is, what is Germany's 
capacity to pay? You are perhaps expect- 
ing that I am about to give you an inventory 
of Germany's natural resources and an esti- 
mate of her productive power. All this has 
been done many times and much industry has 
been displayed in the inquiry. I have no 
doubt that the experts who advised the sig- 
natories of the Treaty of Versailles that Ger- 
many could pay 120 billion dollars had made 
many careful calculations of this kind. But 
what we have to investigate is not Germany's 
capacity to produce wealth, but her capacity 
to pay foreign debt. 

I cannot help thinking that we have here 
the source of the error into which the Ver- 
iailles experts seem to have fallen. Nobody 
has ever doubted Germany's immense power 
to produce, but production by itself is not 
enough. She must find a market for her ex- 
ports, and the problem thus becomes one of 
determining the possible extension of Ger- 
man export trade. Nor is this the end. 
We must remember that an increase in her 
exports will only provide funds for repara- 



tions if there is no corresponding increase 
in imports. Payment for her indispensable 
imports must be the first charge upon the 
proceeds of her foreign sales, and it is only 
the balance, the exportable surplus, which is 
available for reparations. 



"Exportable Surplus" 
Analyzed 

In speaking of a nation's exportable sur- 
plus we must not forget that other factors 
may contribute to it besides the balance of 
exports over imports. Interest received 
from foreign investments and payment for 
external services, such as sliipping, may be 
contributory factors. Before the war Ger- 
many possessed a very considerable export- 
able surplus derived from all three sources, 
but mainly from the interest on her foreign 
investments which were probably worth not 
less than 51/2 billion dollars. As regards the 
surplus from the sale of her products and 
payment for services it is safe to say that it 
never exceeded 100 million dollars a year. 
But what is her position today? 

Most of her foreign investments have gone. 
Some were sold during the war, others have 
been seized as enemy property by the Gov- 
ernments of the Allied and Associated Pow- 
ers, and most of what remain have lost their 
value, as in the case of the Russian invest- 
ments. Her shipping has been largely con- 
fiscated, and she has been deprived of some 
of her most productive areas — Alsace-Lor- 
raine, the Saar Basin, and the Polish prov- 
inces. All the sources whence an exportable 
surplus might have been drawn have been 
greatly impaired if not wholly destroyed. 



Impossible For Germany 
to Pay Out of Exports 

At no time was Germany's exportable sur- 
plus sufficient to enable her to make the an- 
nual payments demanded under the London 
ultimatum ; it is entirely out of the question 
that she could do so todav. 



But let us get a little nearer to the problem 
of Germany's present capacity to pay from 
the surplus sale of her production. Accord- 
ing to a recent statement by the Chancellor 
of the Exchequer in the House of Commons, 
she has paid money and delivered property 
altogether to the value of about two billion 
dollars. Of this amount 1,645 million dollars 
represented the value of ships, coal, other 
payments in kind, property in ceded territo- 
ries and local payments to Armies of Occu- 
pation. The amount in cash has been only 
375 million dollars. And yet, with this com- 
])aratively small cash payment, observe what 
has happened. 

The mark has declined to less than one- 
seventieth of the value it had when the obli- 
gation to pay was imposed upon Germany by 
the Treaty of Versailles. The means of pay- 
ment has been found by the sale of marks. 
After this experience it is difficult to beheve 
that Germany has any surplus at the present 
time from the export of her products. 

There is a further consideration in sup- 
port of this conclusion. It is beyond ques- 
tion that in the last three years Germany has 
made every effort to develop her external 
trade. The German workman, whose industry 
and efficiency are generally admitted, has 
been fully employed and the factories have 
been actively at work all over the country. 



German Competition 
Alreadj' Causes Complaint 

The decline in the mark, which at every 
stage has been much greater in the external 
than in the internal value, has afforded a 
very considerable advantage to the German 
exporter, so much so indeed that there is 
hardly anywhere a manufacturer, producing 
goods for export, who does not complain of 
German competition. Nevertheless, the Ger- 
man trade figures show that the exports, long 
after the immediate deficiency in essential 
foreign commodities due to the war was made 
good, are still barely equal to the imports. 
The conclusion seems irresistible that Ger- 



many has no present capacity to obtain a 
surplus from the export of goods. 

I am not sanguine enough to believe that 
those who think they can extract from Ger- 
many enough money to enable them to meet 
the internal liabilities, which they themselves 
have incurred in restoring devastated areas, 
will be satisfied with the statement I have 
just made. 



Effect of Enforcing 
German Payments 

At the recent Reparation Conference of 
the Allied Powers held in London proposals 
were made of punitive measures to be taken 
with the object of compelling Germany to 
make immediate cash payments, a policy 
which could only have been advanced under 
the conviction that Germany really could 
pay. For my part I do not believe that it is 
within her power to do so, but let us suppose 
for a moment that she can. We have then to 
consider what the effect of this enforced pay- 
ment would be upon international trade, and 
whether it would be to the advantage either 
of Germany's creditors as a whole or of the 
rest of the world. 

If Germany could pay what is demanded 
of her, the only method of obtaining the 
money would be by increasing her exports. 
Now what are these exports to be.'' She is 
essentially a manufacturing nation. Her 
foreign sale of raw materials is comparatively 
small. On balance she is obliged to import 
food, and in consequence of the loss of a 
large part of her mineral lands she is com- 
pelled to import both iron ore and coal for 
the supply of her factories and furnaces. An 
increased exportable surplus could only be 
obtained by extending her sale of manufac- 
tured goods. To do this in the teeth of the 
competition of other manufacturing nations 
she must work longer hours for less wages, 
she must cut profits, she must reduce her im- 
ports to the indispensable minimum. 

But her competitors wiU not consent to 
stand idle while they lose their trade. They 



will find themselves faced with growing un- 
employment and heavy trade losses. So far 
as German goods seek to invade their own 
domestic markets they may endeavor to ex- 
clude them by tariffs, but in order to retain 
their hold on neutral markets they, too, will 
be compelled to reduce wages and cut profits. 
And thus Germany's effort to extend her 
foreign trade must be confronted with the 
opposition of the whole manufacturing in- 
terest of tlie rest of the world, and could only 
be successfully countered by a general lower- 
ing of the standard of life. 

I know it is frequently alleged that the 
collapse of the mark, with tlie accompanying 
disorganization of the world's trade, might 
have been avoided if tlie German Government 
had acted with finnness and good faith. It 
is said that Germany has intentionally depre- 
ciated her currency in order to induce her 
creditors to abandon their claims. We are 
told that her people are not adequately taxed, 
and that if they were subject to the burdens 
borne in some other countries, the Govern- 
ment would be able to meet its liabilities. 



Additional Taxation 
Would Not Help 

It is certainly true that in my own coun- 
try far heavier taxation is levied than in 
Germany, but I am inclined to think we are 
overtaxed and that overtaxation, so far from 
fostering, cannot fail to depress national pro- 
duction. But whether I am right or wrong 
in that opinion I fail to see how additional 
taxation can stimulate foreign trade and pro- 
vide a large exportable surplus. The taxes 
would be paid in marks, and, whether the 
marks are derived from avowed taxation or 
from concealed taxation through the use of 
the printing press, they are in neither case 
a currency which would be accepted in dis- 
charge of foreign liability. 

In the actual condition of Germany a for- 
eign sale of marks is an inevitable accompani- 
ment of the payment of. reparations. Ex- 
cept by such sale there does not appear to be 
any practicable method for the Government 



to obtain the necessary foreign currency 
other than by exacting it from exporters as 
a condition of their receiving an export li- 
cense. But the exporter, who often has ex- 
ternal obligations of his own to meet, does 
not want marks but dollars or pounds ster- 
ling, as the case may be, and forthwith sells 
the marks paid him by the Government for 
the currency he needs. If we add to this 
regular sale in the course of business the 
further sale by Germans who mistrust the 
stability of their own currency, we have a 
sufficient explanation of the stupendous drop 
in the value of German nionev. 



How to Realize On 
German Investments 

Let me come back now to the question of 
what Germany can pay. Certainly she can 
pay sometliing, though not in the form or 
under the conditions it is now sought to im- 
pose upon her. Many Germans possess for- 
eign assets, whether investments or balances 
in foreign banks, and it would be a perfectly 
practicable proceeding for them to sell these 
assets to the German Government, who in 
turn could hand them over to the Reparation 
Commission. But it is an essential condition 
of such a transaction that the owners of the 
foreign assets should be willing to sell them ; 
no Government in the present situation of 
Germany could force a compulsory sale. 
How then could this consent be obtained.'' 

I have no doubt that if these assets could 
be sold for an assured profit the holders 
would be willing to dispose of them. It must 
be remembered that to a considerable extent 
they are the proceeds of sales of marks which 
have been flung by Germans on the foreign 
market under the well-founded apprehension 
that the pressure of reparation payments 
would rapidly depreciate their value. Re- 
lieve this pressure and the mark would im- 
mediately improve. It has still a far greater 
value in Germany than it has outside, and 
the German holders of foreign assets would 
have a clear advantage in selling them for 
marks to their Government. 



German Foreign 
Investments Only 
a Billion Dollars 

It is impossible to give any precise esti- 
mate of the total value of these assets, but I 
believe it would be safe to put them at not 
less than a billion dollars. Whatever the 
amount may be, however, Germany could 
pay it, provided the fall in the mark was 
arrested. More than that I do not think she 
has the ability to find, at any rate for some 
years, and it would be a condition of this 
payment that no more should be demanded 
of her for a long time to come. I believe 
that, looking merely at the amount to be re- 
ceived, the creditors would gain by abandon- 
ing the attempt to obtain other money pay- 
ments for a period of at least three years, 
and I am quite sure the world as a whole 
would be an immense gainer in the general 
stabilization of exchanges which would ensue 
upon an arrest of the fall in the mark. 

Before I leave this part of my subject 
there is one observation I should like to make. 
I have no wish to minimize the just claims 
of the Allies against Germany, and I recog- 
nize the serious political difficulties which 
stand in the way of their abatement. But no 
solution of the reparation is possible unless 
political considerations are subordinated to 
economic facts. Wliat Germany can pay 
maj^ not be a simple question, but it is a ques- 
tion capable of being answered. Unfortun- 
ately the answer runs counter to popular 
hopes, popular passions, and, more formid- 
able still a popular sense of natural justice 
which prescribes that the defeated enemy who 
planned the War should make good the dam- 
age suffered by the victors. And so no au- 
toritative answer is given while Europe 
slides into ruin. 

German Limitations 
Common to All 
Countries 

I have dealt at length with the reparation 
problem in an endeavor to show that a na- 
tion, except in so far as it has an exportable 
surplus, can only pay foreign debt out of the 



wealth it has accumulated outside its own 
country. If we pass now to the other inter- 
national debts we have to recognize that the 
general argument is equally applicable to 
them all. Have the debtors an exportable 
surplus and what are their foreign assets.'' 

With regard to the latter question the 
only debtor possessing any large accumula- 
tion of such assets is England. Notwith- 
standing her immense sale of securities to the 
United States the second and third years of 
the war, a sale which largely furnished the 
means of paying for the goods of all kinds 
bought by the Allies, England still owns suffi- 
cient foreign securities to cover her debt to 
the United States two or three times over. 
But neither France nor Italy has similar re- 
serves of wealth, and I doubt whether either 
of them has sufficient to meet more than a 
trifling part of their foreign debt. 

Only Small Payments 
Out of Export 
Surplus 

There remains to be considered their ex- 
portable surplus in the ordinary way of trade. 
I shall speak later of the circumstances in 
which an exportable surplus from produc- 
tion usually arises, and I shall give my rea- 
sons for thinking that nothing more than 
comparatively small annual payments can 
ever be made in this way. But it will be more 
convenient now to deal with an individual 
debt and I will ask you to consider the par- 
ticular case of the debt from France to Eng- 
land, which I can speak about with more 
freedom as it is a debt in regard to wliich 
my own country is the creditor. We shall 
get a clearer view of it if we examine the 
circumstances in which it was incurred. 

During the War France developed an im- 
mense demand for goods of foreign produc- 
tion. As an increasing proportion of her 
manpower became engaged in her army, her 
capacity to supply herself was progressively 
reduced. She had no abundance of foreign 
securities with which to pay for her require- 
ments and she could obtain the war materials 
indispensable for the maintenance of the fight 



in no other way than by borowing the money 
to pay for them. 

Before the United States came into the 
War France had borrowed one billion dollars 
from the British Government, and this 
amount was subsequently increased to over 
2^ billion dollars. The price of the goods 
bought by France was naturally high. Com- 
modities produced to meet an urgent war 
need can never be cheap. But France was 
obliged to have the goods, whatever the price, 
and a great stimulus was given to American 
and British trade. 

How Could France 
Pay Her Debt? 

Let us now reverse the process and im- 
agine France paying off this debt. She could 
only do so by producing goods and export- 
ing them in very large quantities, far in ex- 
cess of normal trade demands. If the gen- 
eral trade organization of the world per- 
mitted of the absorption of this additional 
French output, I have no doubt that her in- 
dustry would be capable of the effort neces- 
sary to enable her to pay interest and sink- 
ing fund on her debt. But would there be 
any willingness to receive the goods ? Neither 
England nor any other country is prepared 
today to pay for and consume goods on an 
exceptional scale. The immense demand cre- 
ated by the War has no parallel in peace. 
And yet how is France to pay unless an ex- 
ceptional demand exists? 

The truth is that her debt is far too great 
in relation to ordinary international trade 
possibilities. It was incurred by the pur- 
chase of goods required in war and bought 
at war prices. It could only be discharged 
by the transmission of goods, not wanted in 
peace, and sold at no less high prices. We 
became accustomed in war to talk in bUhons. 
Our language was suited to the circumstances 
of the time, but, if we carry our minds back 
to 1914 and return to the ideas appropriate 
to peace conditions, we shall recognize at 
once that France has no trade surplus or 
reserves of accumulated and exportable 



wealth to enable her to meet her present ex- 
ternal liabilities. 

There are of course conceivable, though I 
trust improbable, conditions in wliich the 
French Debt to us might be repaid. If we 
were at war and the call upon our men to 
line the trenches was such that many of our 
mines and factories had to close down ; and 
if France were at peace and at liberty to 
increase her output to the utmost of her 
capacity she might pour upon our shoi-es war 
material and stores equal to the whole amount 
of her debt to us. But in what part of the 
globe is there a demand for this additional 
output in time of peace.'' The mere endeavor 
to extend her foreign sales to the necessary 
degree would disorganize the trade of the 
world. We have seen the painful effect of 
an enforced competition by Germany ; we 
should experience precisely the same results 
from a similar effort by France. 

The inevitable conclusion- is that these in- 
ternational debts -are far too great for the 
capacity of any of the debtor countries ex- 
cept England. She alone in her accumulated 
foreign investments has adequate resources 
with which to disciaarge her liability to the 
United States. 

French Resources 
Unequal to 
Obligations 

Of the others, France has the greatest re- 
sources, but they are, I believe, quite insuffi- 
cient to meet her obligations. The whole 
subject requires a rational reconsideration 
by the creditors, who must keep steadily in 
view the immediate effect of the payment of 
these debts on the general trade of the world. 
The creditor countries will obtain greater 
advantage from trade prosperity, which will 
insure full employment in their factories and 
workshops, than they can ever receive from 
the precarious payment of these debts. 

In the last two years we have had experi- 
ence of the effect upon foreign trade of tum- 
bling exchanges and broken-down credit, and, 
though the consequences may be more serious 



in England than in the United States, where 
foreign trade is comparatively only a small 
part of the total trade, they are still grave 
enough in the latter country also to warrant 
the fullest and most careful consideration. 

Real Meaning of 
an "Exportable 
Surplus." 

It may be objected that my argument ap- 
pears to lead to the unpalatable conclusion 
that no nation, unless it has accumulated re^ 
sources in the form of foreign investments, 
can discharge external obligations to any- 
thing more than a comparatively small 
amount. This is an objection which goes 
to the very root of the question of inter- 
national loans and forces us to a considera- 
tion of the real meaning of an exportable 
surplus. I cannot do more than touch upon 
it briefly now without stretching your pa- 
tience beyond the limit, of extreme good 
nature. 

It seems to me that the most compact form 
in which I can present the case is by calling 
your attention to the experience of England 
as a creditor country. For over two cen- 
turies British capital has been lent to other 
countries. Year by year England produced 
more than she either consumed herself or 
could exchange for the products of other na- 
tions, and slie could nQ,t obtain a market 
for the surplus unless she gave the purchaser 
a long credit. Foreign loans and foreign 
issues oT all kinds were taken up in England 
and the proceeds were spent in paying for 
the surplus production. British factories 
and workshops were kept in good employ- 
ment, but it was a condition of their pros- 
perity that a jmrt of their output should be 
disposed of in this way. 

Taking the aggregate of the transactions 
British creditors have received a good re- 
turn on their investment, but the ability of 
the debtors to pay has been dependent, speak- 
ing generally, on the development of their 
country being fostered by the receipt of 
further loans. If we take the whole field of 
British foreign investment we shall find that 



every year England has returned in loan* 
more than she received in interest, and the 
balance of the world's indebtedness to her 
has steadily been growing. 

From tliis view of loans made to foreign 
countries they might seem at first sight to be 
somewhat unremunerative. If the creditor 
has to go on lending in order to be paid the 
interest on previous loans, a bad debt would 
appear to be the only possible end to the 
business. But this is by no means the case. 
While tliis continuous lending has been true 
in the past in the aggregate of foreign loans, 
it is not necessarily true in any individual 
instance, nor does it follow that it will al- 
ways be true of the loans as a whole. 

In our experience as bankers it is not un- 
common to see loans to corporations and 
firms justifiably increasing in amounts. The 
borrower may show by the growth of his 
business and expanding turnover that such 
advances are thoroughly warranted, and, in 
spite of his greater total of indebtedness, his 
credit may be improving and his balance- 
sheet may disclose an increasing surplus. 
What is true of an individual or corporation 
may be true of a country, but on a larger 
scale and viewed over a much more extended 
period of time. The life of an individual, or 
even of the most successful company, is as 
nothing compared with the life of a nation. 



United States as 
an Example 

Take the case of your own country. The 
United States has been the greatest external 
borrower in history. You required foreign 
capital for your internal development and 
you took from England alone not less than 3 
billion dollars. It is estimated that at the 
time of the outbreak of the war your ex- 
ternal debt had become stationary in amount, 
and that your exportable surplus of commod- 
ities sufficed to pay the whole of the inter- 
est. Repayment of the capital, however, 
would have been beyond even your capacity 
for a very long period had it not been for 
the opportunity afforded by the war. As 



you know, there arose then an inexhaustible 
demand in Europe for American goods, which 
led to an immense increase in your exports. 
Payment for these exports was largely made 
out of the proceeds of the sale of the stocks 
and bonds held in England, and thus a cap- 
ital liability which had been growing for over 
two centuries was almost entirely discharged 
in a few years. 

We see, then, that a debtor nation may in 
certain circumstances pay off its foreign 
debt with remarkable ease and rapidity. The 
indispensable condition for such rapid re- 
payment is that there should be an extraor- 
dinary demand for its goods, a demand 
which is a natural accompaniment of war 
but does not exist in peace. I cannot help 
tliinking that there has been a general, though 
very natural, misunderstanding of the con- 
ditions under which international payments 
are made. In its present magnitude the sub- 
ject is new. 

Mistaken Opinions 
Causing Grave 
Disasters 

In the past we have been accustomed only 
to the discharge of comparatively small lia- 
bilities between nations which has been 
effected partly by the remittance of gold, 
and partly by an extension of export trade 
facilitated by a fall in the exchange of the 
debtor country, and it is not easy for us 
now to free ourselves from the ideals we have 
formed in the course of our past experience. 
Mistaken opinions on these economic ques- 
tions are not surprising, but they are caus- 
ing grave disasters throughout the world. It 
is not many years ago — it is well within my 
own recollection — that a want of understand- 
ing of sound principles of banking led to re- 
peated financial crises which were then be- 
lieved to be inevitable. As they usually hap- 
pened at intervals of ten or eleven years, 
many serious persons attributed them to the 
variations which occur in the spots on the 
sun. These spots may affect the weather 
and, through the weather, the harvest, but 
a wider knowledge of banking and of cur- 



rency requirements has taught us how to es- 
cape their malign influence on credit. 

A better understanding of international 
trade and of the possible limits of interna- 
tional payments wiU quickly enable us to find 
a remedy for the evils which now distract us. 
The public on both sides of the Atlantic are 
beginning to take a more rational view than 
was possible three years ago, and if the lead- 
ers of opinion direct our footsteps along the 
right path I believe the world is now prepared 
to follow it. 



Mr. McKenna's 
Conclusions 

To sum up : the conclusion to wliich I am 
driven is that Germany can only pay now 
whatever she may have in foreign balances, 
together with such amount as she can realize 
by the sale of her remaining foreign securi- 
ties ; that this payment is only possible if 
all other demands are postponed for a definite 
period long enough to insure the stabilization 
of the mark ; and that future demands at the 
expiration of this period must be limited to 
the annual amount of Germany's exportable 
surplus at that time. Further, that England 
has the capacity to pay to the United States 
interest and sinking fund on her debt, but 
that the other debtors are none of them in 
a position to meet more than a small part of 
their external liabilities, and in the existing 
condition of Europe a definite postponement 
of any payment by them is desirable in the 
interests of all parties. 

The actual amount which the other debtors 
could ultimately pay should, as in the case 
of Germany, be ascertained by inquiry into 
their exportable surplus at a full and frank 
conference between creditors and debtors. 

It remains only for me now to thank you 
for the patience with which you have heard 
me. I have strictly confined myself to a 
consideration of the economic aspect of Rep- 
arations and International Debts, how they 
are payable, the general capacity of a debtor 
country to pay, and the effect of payment. 



If I have become convinced that an attempt 
to enforce payment beyond the debtor's 
ability is injurious to the international trade 
of the whole world, lowers wages, reduces 
profits, and is a direct cause of unemploy- 
ment, the conclusion is founded solely on 
economic grounds and is uninfluenced by any 
political considerations or any regard to the 
moral obligations of the debtors. 

I know very well that there are other con- 
siderations affecting these debts, but these 
are matters of statecraft to be determined 
by the rulers of the creditor countries ac- 
cording to their view of wise policy, which 



covers many interests besides those of trade 
and finance. The fact that a debtor cannot 
pay does not of itself discharge the obliga- 
tion. The debt majf become the subject of 
negotiation and bargain by which if the 
debtor obtains relief, the creditor may still 
recover some advantage to which he may be 
justly entitled. But I conceive it to be the 
duty of bankers to help so far as they can 
in forming a sound public opinion upon the 
financial and commercial aspects of these in- 
ternational debts, and it is in pursuance of 
this duty that I have ventured to make these 
observations today. 



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